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India’s reliance on gas for energy transition not best long-term strategy: IEEFA

India’s strategy to cover unmet energy requirements by creating dual connections of gas and electricity will require a balancing act to ward off environmental & capital loss, says a report
India’s reliance on gas for energy transition not best long-term strategy: IEEFA
India’s reliance on gas for energy transition not best long-term strategy: IEEFA
  • India’s bridging measure to meet the goal of lowering carbon emissions with a push for gas may not be the best long-term strategy
  • Fulfilling the gas needs of the country with imports — a sector with highly uncertain dynamics — puts both affordability and energy security in question

New Delhi: India’s strategy to cover unmet energy requirements by creating dual connections of gas and electricity requires a balancing act to ward off environmental and capital loss and is not the best long-term strategy, a new report by the Institute for Energy Economics and Financial Analysis (IEEFA) has said. In the wake of the Indian government’s strong commitments to increase the share of gas in the country’s energy mix, vital questions emerge about the fiscal risks of such a move, as well as the fossil fuel’s place in the scheme, said the IEEFA report. At the same time, judicious investment in renewable energy looms as a means of leapfrogging legacy technology, delivering economic benefits and limiting emissions.

Relying on gas for energy transition may lead to stranded assets

The government is planning to expand gas’ share in the energy scene from the current 6 percent to 15 percent by 2030, with a particular focus on increasing its use in the cooking and transport sectors. Major investments have begun towards rapidly increasing the availability of this largely imported fossil fuel via infrastructure for importing, transport and distribution. Domestic production is tipped to rise, thanks to new gas discoveries, even if the domestic price cap reduces the incentive for Indian producers to take on this risk.

The most recent amendment in the domestic gas price ceiling for new deep sea discoveries from US $3.92 mmBtu to US $6.13 mmBtu may temporarily incentivise private investment, but this may not be sustainable in the long term, considering the increasing volatility in gas prices globally, based on which the domestic prices are revised with a lag.

As other countries commit to net zero carbon emissions in the longer term, India’s bridging measure to meet the goal of lowering carbon emissions with a push for gas may not be the best long-term strategy.

In effect, the IEEFA report said that prioritising new gas infrastructure over the infrastructure cost advantage of distributed clean solar and wind, particularly in rural areas, may lead to stranded asset risks for the country.

Dependence on LNG risks energy security, self-reliance goals

The report author and energy analyst Purva Jain said that optimising the use of available gas and investing in greening the electricity grid can reap greater long term results for the country. “Top priority should go to the existing commitment to achieve 450 gigawatts (GW) of renewable energy by 2030,” said Jain.

India’s domestic gas peaked in financial year 2010-11 and even then the country imported 20 percent of its gas needs. Last financial year, the import component was 54 percent. Increasingly, fulfilling the gas needs of the country with imports — a sector with highly uncertain dynamics — puts both affordability and energy security in question, said the IEEFA report.

“The reality of increasing LNG prices will make gas unaffordable for consumers and adversely affect the profitability of suppliers,” said Jain. The latest 69 percent increase in the price ceiling for deep sea discoveries, including the recently producing Reliance-BP KG-D6 block would also translate to higher gas price for consumers, said Jain, making domestic gas an unaffordable proposition. “A collapse in demand runs a big risk of gas-based assets remaining under-utilised and becoming stressed in the near future,” the author noted.

“This price volatility of LNG must be a key consideration before locking-in investments in gas infrastructure. India’s high and growing dependence on gas further diminishes benefits, risking not only India’s energy security but also its current account, currency value and self-reliance goals.” Considering the entire lifecycle of exploration, transmission and distribution, Jain said, gas’ benefits are seriously diluted.

Cleaner substitutes needed for dirty, unhealthy fuels

There is an urgency for a switch to cleaner cooking fuels given the large proportion of the population still uses solid fuels — which are harmful to health and the environment — for their cooking needs. The government’s transition push involves a shift towards piped natural gas (PNG) in urban areas and increasing the availability of liquefied petroleum gas (LPG) in rural areas. IEEFA noted that there is a greater benefit in encouraging a switch to electric cooking in rural areas and diverting existing gas to the generation of electricity. Further, it said that the government should encourage and facilitate the use of solar micro-grids, which become extremely cost effective with increased electricity use.

“The recent increase in gas prices which is expected to result in higher prices in the city gas distribution (CGD) segments may further delay consumers’ switch to PNG and CNG,” said Jain. “Even if the immediate price impact is limited, there would be further upward revisions in April 2022 based on the high gas prices prevailing right now,” said the report.

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For a switch to cleaner mobility, the government hopes to increase the number of buses and taxis using CNG which might hit a roadblock now with ever increasing gas prices. The government also aims to increase the share of electric vehicles (EVs) in India and that appears to be a more tenable strategy. Policy incentives for the increased electrification of public transport have also been put in place.

Jain said that one fuel choice cannot be enough for India. “A more staggered approach would achieve economies of scale and make the cleaner electric sources cost-competitive without any support. The government should incentivise the purchase of EV passenger cars to lower emissions, increase acceptability, pique businesses’ interest in the sector and encourage investment in EV infrastructure,” said the author.

Electricity can reduce reliance on energy imports

Increasing electricity use, the report said, provides economic and environmental benefits alike while reducing India’s dependence on energy imports. Electricity enables accelerated scaling up, given the country’s virtually 100 percent connection coverage. Going electric, whether conventionally generated or renewable, leverages existing infrastructure and avoids locking in a second energy distribution network.

Gas, on the other hand, has failed to reach scale in India over the past two decades, remaining a cooking and mobility option in limited urban areas, and is not assisting in lowering carbon emissions. As global cities start to shun gas and move to zero carbon emissions, the report said, investing in this fuel of the past is a strategy that needs to be evaluated with a long-term vision. 

“Government policies have made investing in gas very lucrative at the moment but, from a longer-term business case perspective, such policies may change as global investment accelerates its exit from fossil fuels,” said Jain. “Increasing gas prices could further risk gas investments as India’s price-sensitive consumers will switch to competitive options if gas becomes expensive. India should take this opportunity to leapfrog new gas networks in favour of electricity for cooking and mobility,” said the report.

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